No need for bank dividend cuts, say Credit Suisse

Clancy Yeates

Published: January 12 2017 - 12:00AM

Banks' juicy dividends can be sustained in the face of looming increases in capital requirements, as lenders have probably raised the vast majority of the capital they will need, according to new analysis from Credit Suisse.

With bank shares trading just below one-year highs after a recent surge, the bullish banking analysts argue the market will be forced to revise predictions that two major banks will cut dividends in 2017.

The prediction comes after global banking regulators last week delayed a long-awaited decision on the next round of capital rules, which some observers saw as a sign these requirements will be watered down.

Commonwealth Bank, Westpac, National Australia Bank and ANZ are among the biggest dividend payers in the country, spinning off more than $20 billion a year to shareholders.

However, there was growing debate in 2016 over whether lenders would have to follow the lead of ANZ, which last year cut its dividend for the first time since the global financial crisis. The consensus estimates among analysts is for National Australia Bank and Westpac to make such cuts this year.

Problem solved?

In a new report, Credit Suisse analysts Jarrod Martin, James Ellis and Brendon Ferreira argue capital is "no longer a problem" for the local banks, and therefore that dividends can be maintained.

While final capital rules are uncertain, the report says the big four raised about $14 billion in equity capital in 2016, and it estimates the lenders now only need about $4 billion more in capital to satisfy the next round of capital changes.

That would be easily achieved through retained earnings or asset sales and would not require dividend cuts.

"It's no longer the elephant in the room that some were calling it," Mr Martin said about bank capital. "Let's move on and talk about something else."

The prediction follows a surge in bank shares over recent months, a trend that helped tip the entire ASX 200 into a bull market.

Other analysts are more pessimistic than those at Credit Suisse, however.

Morgan Stanley's Richard Wiles said in a note this week that a dividend cut from Westpac looked "increasingly likely", and he is also tipping a dividend cut from NAB.

In contrast to Credit Suisse, Morgan Stanley has a "negative" stance on the Australian banks, citing "downside risks" to earnings because of falling margins, higher loan losses and tougher capital requirements.

Chiefs eye ratio

Westpac chief executive Brian Hartzer said in November the bank's decision to keep the dividend on hold meant that its dividend payout ratio of 80 per cent was "a little higher than we would consider sustainable over the long term".

NAB's dividend payout ratio also rose to 80.8 per cent last year, above its target range, though chief Andrew Thorburn said at the time it made "absolute sense" to maintain the payout to shareholders.

The market debate about bank capital – a key influence on dividends – is unlikely to be resolved until global regulators settle on a new capital regime for the industry.

The global regulator club, the Basel Committee on Banking Supervision, last week said it would conclude work on the reforms in the "near future," and the Australian banking regulator does not expect to have final guidelines until late this year.

This story was found at: http://www.theage.com.au/business/banking-and-finance/no-need-for-bank-dividend-cuts-say-credit-suisse-20170111-gtpczr.html